On 12 November, in his (virtual) speech at the Mansion House, Sam Woods, chief executive of the PRA, set out “the intention of the Prudential Regulation Authority to implement a ‘strong and simple’ regime for regulating small UK banks and building societies”. The BSA is in full support. Apparently, the City bankers, who attended the Mansion House dinner in person last year, nearly choked on their beef fillet when Sam took 10 minutes to talk about a new capital regime for credit unions. Credit unions! This year, although there was no physical beef fillet to choke on, Sam followed up by outlining plans “to bring in a simpler prudential regime for small banks and building societies.”
Sam was of course clear that there can be no weakening of prudential standards of soundness and resilience. Simpler need not mean weaker, just as “more complex” is not necessarily stronger. We agree. And much of the inappropriate complexity rose from applying Basel standards designed for large international banks to small, simple domestic deposit-takers, as the EU single rule book unwisely insisted.
The BSA also greatly welcomes what Sam said about "dynamic plumbing" and we share the delight of his PRA colleagues at “the government’s view that the most effective way to [implement these regulations] is to delegate responsibility for the implementation of firm requirements to the Regulators, subject to an enhanced accountability framework. This means that the vast majority of the updated banking regime will be implemented in PRA rules.” This is indeed very much in line with what the BSA has been saying - to anyone who would listen - since September 2016! We are also intrigued by the new meaning attributed to dynamic plumbing. Previously, we understood this to be a polite term for the phenomenon observed every year in mid-late July, and again in mid December, ahead of the respective holidays: a large and pent-up volume of regulatory stuff is suddenly expelled by the regulator, rather like what happens when a blocked toilet is Dyno-rodded! That was what we thought dynamic plumbing meant, but now we know better…..
Moving back to proportionality, Sam clearly understands the complexity problem well: “the costs of understanding, interpreting and operationalising prudential requirements, which have become more complex since the 2007-08 crisis, may exceed the associated social benefit for small firms (but not large ones). On the cost side, a fixed element of these costs may mean that average costs will be higher for small firms.“ Precisely - a hole in one! And the BSA also supports Sam’s approach to start with the simplest regime for the smallest firms - credit unions last year, and now the smallest banks and building societies: as we have said often enough at the BSA - think small first!
The devil of course will be in the detail, and we greatly look forward to the promised discussion paper - Sam was right to sketch out ideas and direction but not try to roll out a blueprint - there needs to be a lot of constructive debate and discussion and the BSA will be very much part of that, as we have been advocating greater proportionality for many years.
We worked on this with various European colleagues to produce a groundbreaking position paper about 18 months ago. So we are delighted that the PRA is (independently) coming to very similar conclusions - great minds are starting to think alike!
So, in conclusion: KISS - Keep It Strong and Simple - what's not to like in that? And read the speech for yourself....